Here’s why the NatWest share price could be too low to ignore

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When it comes to banks, Lloyds Banking Group and Barclays seem to get most of the investor attention. But I feel the market might be overlooking the NatWest Group (LSE: NWG) share price.

That might not be too much of a surprise. After all, as Royal Bank of Scotland, some dubbed it as the bank that almost broke Britain.

It was the one that needed the huge bailout, to save the whole bank sector. But NatWest is doing a lot better now, as the Friday’s update shows.

Strong quarter

The bank beat forecasts for the first three months of the year, with a profit before tax of £1.8bn. It comes a day after Barclays also beat City expectations.

High interest rates are hurting borrowers, and they could lead to bigger bad debt provisions for the lending banks. In fact, NatWest recorded a £70m net impairment charge, though that seems modest.

There’s a good side too, in that high interest helps boost lending profits. We saw a net interest margin of 3.27% in the period, up 7 basis points on the previous quarter.

Tough year

There could be a lot to come for the rest of the year though. Impairments in Q1 might be low, but we haven’t felt the full force of high inflation yet. After it topped 10% in March, we need to brace for another possible Bank of England rate rise at its next meeting in May.

Such fears might well lie behind the market’s cold response to this Q1 news. In early trading, the NatWest share price fell 5%.

The latest bank scare from the US could be holding buyers back too, as a run on deposits puts pressure on First Republic Bank. Its stock has plunged, and it seems it’s working hard to avoid the government taking it over.

But this is all short-term stuff, and I think NatWest looks like a buy for the long term.

Dividend rises

Analysts suggest FTSE 100 dividends will start to rise again in 2023, and they could come close to the all-time record year of 2018. More importantly, the City thinks the financial sector should lead the charge this year.

The latest forecasts put the NatWest dividend yield above 6%. And it would be more than 2.5 times covered by expected earnings.

Does that sound like a stock that deserves a super low price-to-earnings (P/E) ratio of six? And dropping to five based on the outlook for the next couple of years? That would be only about a third of the FTSE 100‘s valuation.

Too cheap now?

It sounds too cheap to me. But it shows the market’s weak sentiment towards bank shares right now.

I can understand the caution, as there really is a tough year ahead. But I do think investors have factored all of the risk into the share price already. And then some.

I think the bank sector offers some of the most attractive buys in the FTSE 100 right now, for those in it for the long term.

The post Here’s why the NatWest share price could be too low to ignore appeared first on The Motley Fool UK.

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Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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